China cuts banks' reserve ratio for first time in 2023 to aid recovery

© Reuters. FILE PHOTO: Paramilitary police officers stand guard in front of the headquarters of the People's Bank of China, the central bank (PBOC), in Beijing, China September 30, 2022. REUTERS/Tingshu Wang

By Ellen Zhang and Kevin Yao

BEIJING (Reuters) -China's central bank said on Friday it would cut the amount of cash that banks must hold as reserves for the first time this year to help keep liquidity ample and support a nascent economic recovery.

Chinese leaders have pledged to step up support for the world's second-largest economy, which is gradually rebounding from a pandemic-induced slump after coronavirus-related curbs were abruptly lifted in December.

The People's Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) for all banks, except those that have implemented a 5% reserve ratio, by 25 basis points from March 27.

The move, which came earlier than financial markets had anticipated, follows data showing a gradual but uneven recovery in the economy in the first two months of the year and a stronger-than-expected credit expansion.

"At present, risks in the overseas banking sector are increasing and global liquidity is under pressure, and the external environment is becoming increasingly complex," said Wen Bin, chief economist at China Minsheng Bank.

"In the first two months of this year, China's main economic indicators showed a positive trend, but the overall recovery foundation is not yet solid."

The central bank has yet to give an estimate of how much long-term liquidity will be released following the cut, which will allow banks to lend out more funds.

Analysts estimated that the move freed up over 500 billion yuan ($72.6 billion).

The central bank has promised to make its policy "precise and forceful" this year to support the economy, keeping liquidity reasonably ample and lowering funding costs for businesses.

It said the cut reflected its intention to "make a good combination of macro policies, improve the level of services for the real economy, and keep liquidity reasonably sufficient in the banking system."

China's new premier Li Qiang has pledged to push the overall economy to improve while fending off any major risks, state media reported on Friday.

The reduction follows a 25-bps cut for all banks in December.

'EFFECTIVE TOOL'

Central bank chief Yi Gang told a news conference on March 3 that China's real interest rates are at an appropriate level and cutting banks' reserve requirements will still be an effective tool to support the economy.

The PBOC has cut the RRR 15 times since 2018, from nearly 15%, and some analysts have speculated over how much room it has for further reductions.

"This will provide a bit of financial relief for China’s large and medium-sized banks," Julian Evans-Pritchard at Capital Economics said in a note.

"It may also help nudge down lending rates slightly. But given the wider signs of policy restraint, we doubt it will have a significant and lasting impact on monetary conditions or credit growth."

The weighted average RRR for financial institutions stood at around 7.6% after the cut, the central bank said.

China's economic activity picked up in the first two months of 2023 as consumption and infrastructure investment drove a recovery from COVID-19 disruptions. But its other traditional growth engines are a big question mark: Exports are expected to remain weak amid a global downturn and the crisis-hit property sector is only slowly beginning to turn the corner.

China has set a modest target for economic growth this year of around 5% after it cooled to only 3% last year, one of the weakest showings in nearly half a century.

($1 = 6.8912 Chinese yuan renminbi)